The private credit market
The private credit market is seen as poised for substantial growth and development, driven by market globalization, technological advancements, and increasing investor demand for stable and predictable income streams. The private credit market is predicted to be expanding more rapidly than traditional credit markets, driven by a secular reduction in bank balance sheet assets triggered by regulatory changes and subsequent structural changes in public markets. This shift is potentially, but as intended, reducing systemic risk while also further enhances the attractiveness of private credit.
Increasing allocations of private wealth to alternative investments and substantial global infrastructure funding needs are providing strong tailwinds. These factors arguably contribute to a robust pipeline of investment opportunities and sustained market growth.
From an investor perspective, particularly through credit-oriented funds, private credit has been claimed to offer more predictable performance due to a focus on interest collection rather than capital gains. Said predictability is appealing to investors seeking steady income streams, reinforcing the attractiveness of private credit investments.
From a market structure perspective, itis apparent that new business models are evolving to meet diverse borrower and investor needs, offering flexibility and tailored investment solutions. This adaptability is crucial for accommodating various risk appetites and return expectations, which is especially relevant in the context of structured credit and SRTs.
Looking at the asset management industry, a related common narrative is that the sector is expected to see more significant consolidation and the emergence of larger, more sophisticated players capable of offering comprehensive and innovative credit solutions. More specifically; i) the market is becoming more globalized and consolidated, with larger asset managers being able to leverage from economies of scale, and ii) this trend supports the development of more sophisticated and larger-scale investment opportunities.
Looking specifically at the structured credit part of this market, however, is there a case that this development also creates opportunities for smaller and more specialized investors?
The potential role of Independent structuring and advisory firms in supporting this development
· Deal sourcing and origination: Independent advisory firms can leverage their extensive networks on both the originator and investor sides and market insights to identify high-quality lending opportunities and structured credit deals that align with the risk-return profiles of private credit investors.
· Market Intelligence: Providing originating banks and non-bank originators with up-to-date market intelligence on emerging trends, sectors with high potential, and geographic regions that are underexplored.
· Risk assessment and Due Diligence: Conducting thorough due diligence on potential transactions to assess credit risk, collateral quality, and borrower financial health.
o SRT Suitability: Evaluating whether transactions are suitable for Significant Risk Transfer(SRT) structures, ensuring they meet regulatory requirements and offer sufficient risk mitigation for the originating banks.
o Structuring and Syndication: Advising on the optimal structuring of deals to enhance their attractiveness to private credit investors
o Syndication: Helping to syndicate deals by bringing together a consortium of investors, including smaller and more specialized investors who can benefit from collaborative investments.
· Regulatory compliance and reporting: Assisting originating banks in navigating complex regulatory environments to ensure that all transactions, including SRTs, comply with relevant laws and regulations. Ensuring that all parties involved have access to clear and accurate reporting on transaction performance, risk exposure, and compliance status.
· Value-added services: Offering ongoing portfolio management services to monitor performance and manage risks, providing originating banks and investors with peace of mind and operational efficiency. Developing innovative financial products and tailored investment solutions that meet the evolving needs of private credit investors.
· Facilitating smaller and specialized investor participation: Advising on the use of implied leverage in structured credit products to create higher-yielding investment opportunities without requiring direct borrowing and managing associated risks.
o Helping smaller and specialized investors identify and exploit niche opportunities within the structured credit market, such as focusing on specific sectors or geographic regions.
o Facilitating partnerships and syndicates among smaller investors to enable participation in larger and more complex transactions, thereby spreading risk and leveraging collective expertise.
To conclude, independent structuring and advisory firms have the potential to play a crucial role in the growth of the private credit market by leveraging their networks to source high-quality lending opportunities, providing market intelligence, and conducting thorough risk assessments and due diligence. They assist much needed in regulatory compliance, structuring and syndicating deals, and facilitate smaller and specialized investor participation through implied leverage and strategic partnerships, offering value-added services such as portfolio management and the development of tailored investment solutions.
